Private credit · Global
Loan notes explained
How loan notes and asset-backed notes work, who stands behind them, and what to check first.
Summary
A loan note is a debt instrument issued by a company or special purpose vehicle that promises to pay interest and repay capital on set dates, usually without a public market to sell it.
- Loan notes are only as strong as the issuer and any security behind them.
- Many are unlisted and hard to sell before maturity.
- Rules on who can be offered them differ by country.
What is a loan note?
It is a form of borrowing: you lend money to an issuer and receive a note setting out the interest, term and repayment.
The issuer might be an operating company, a property developer or a special purpose vehicle created for one project. Interest is usually fixed and paid periodically or at maturity. The note is a contract, so everything depends on its terms.
What stands behind the note?
It depends on the terms: some notes are secured on assets, others are unsecured and rely on the issuer's ability to pay.
Secured notes may give a trustee or security agent a claim over specific assets, such as property or receivables. The value of that security, its ranking against other lenders and how easily it can be enforced all matter. Unsecured notes rank behind secured creditors if the issuer fails.
What are the main risks?
The main risks are issuer default, weak or overvalued security, concentration in one project and limited liquidity.
Projects can overrun, assets can be worth less than expected, and interest or capital can be delayed. Some notes are issued by newly formed entities with little track record. A high stated rate often signals higher risk, not a bargain.
What should you ask before investing?
Ask who the issuer is, what the money is for, what security exists and who holds it, what happens at maturity and what the costs are.
Look at the issuer's accounts or project plan, the independence of any valuation and the experience of the people involved. Check who the trustee or security agent is, whether the note is regulated or promoted under an exemption where you live, and how you could exit early, if at all.
Frequently asked questions
Are loan notes the same as bonds?
They are similar, but bonds are often listed and traded, while loan notes are usually private and illiquid.
Are loan notes protected by a compensation scheme?
Usually not. Protection depends on the issuer, the structure and the jurisdiction, so ask and check.
Can I sell a loan note early?
Often not. Check whether the terms allow early redemption and at what cost.
Who can be offered loan notes?
This varies by country and by investor category. Many offers are limited to professional, sophisticated or accredited investors.
This article is general information for eligible investors. It is not investment advice or an offer. Capital is at risk. See our Terms and Risk warning.
